Fall 2014 • Issue 53, page 13

Model Commercial Real Estate Receiverships (MCRERA)

By Dunfee, Gordon*


Twice a year for the past few years, the Uniform Law Commission has assembled a group of attorneys, title insurance experts, receivers, law professors and bankruptcy trustees in a concerted effort to craft a uniform receivership law. The proposed new law would be submitted to all fifty states to standardize the statutes that apply to the creation of receivership estates, their powers, their relationship to the parties, as well as other nuances that are near and dear to the heart of all receivers and the courts. If enacted by the majority of states, its effect would be dramatic in that, instead of hundreds of laws in all of the different jurisdictions, there would actually be some uniformity, some logic, if you will, to the madness that presently exists in many states that have little direction (other than Common Law) to assist the practitioners and the courts to properly and efficiently move forward with the appointment of receivers.

At this meeting in Chicago, I had to run into battle with the CRF flag solo without the intellect, wit, and experience of my colleague Beverly McFarland. Unfortunately, Beverly - who has attended and, in the recent past, successfully lobbied for sanity in the ULC’s approach to the MCRERA - was unable to attend the Chicago meeting due to a planned knee replacement surgery. Kudos also to CRF’s own Peter Davidson who provided a very detailed written analysis of the MCRERA.

Similar to prior ULC committee meetings, there were 18-20 attendees from all over the country including from New Mexico, California, Kentucky, Virginia, Colorado, Minnesota, Utah, Missouri, Oregon, and Alabama, all led by Chair Tom Hemmindinger and Reporter Wilson Freyermuth.

Literally every single line and section of the proposed MCRERA was discussed, debated, rehashed and edited as the meeting rolled on. All attending either agreed, or agreed to disagree, on all provisions contained in the Model Act. It is noteworthy to point out that while there are many different types of receivership actions (rents and profits, equity, SEC, family law, etc.), this MCRERA is narrowly focused only on commercial real estate receiverships.

It would literally take up the entire year of Receivership News to chronicle the entire meeting, so I will try to summarize some of the salient points of discussion below:

Perhaps one of the more interesting provisions is Section 3. The committee was clear that the Act was to apply to receiverships that were commercial property only, i.e., this was not intended to include single family homes. Therefore the issue of “Exclusions” was discussed. Homestead statutes in every state will need to reconcile with this proposed uniform law. How about home offices as a “hook” to bring the property into this Act, as a commercial use of the real estate? Presently the MCRERA excludes single family residences up to four units. Issues were discussed of possible abuse of this exclusion by judgment debtors moving family members into extra units. Unless the owner is collecting rents from the other units, this would then fall under the commercial designation and the Act would apply. Another persistent challenge to enactment will be the cases involving large agricultural businesses that defaulted on their secured loan(s), yet the borrower lives on the property. While this point was not resolved, it was suggested that there be a “carve-out” provision allowing the court to carve out the homestead and permit the receiver to sell the remaining real property.

Power of the Court
We had a fascinating discussion about Section 4: Power of the Court. The Kentucky attorneys lamented the practice of “traveling” judges and the fact that an order from one county may not be enforced in another county within that same state. Another issue raised was the power of the court over commercial properties subject to a receivership order but located outside the state of the appointing court.

Our discussion on Section 5 helped clear up some misunderstandings on issues of the effect of an order on property and the individual owner.

Identity of Receiver
We again had debate over Section 6: Identity of Receiver, Disclosure of Interest. We discussed that the receiver has to be an independent, neutral third party, unrelated in any way to the party seeking the appointment. Many of the smaller populated states were concerned about the potential circumstance that the parties could not produce a “neutral” person. As it turns out, the more likely driver on this point was that the appointing party wanted someone in their camp, and foreseeably (albeit forcibly), to have the opposing party stipulate to that individual. Of course, I talked myself blue in the face on this issue, that the appointment had to remain independent.

After notice and hearing, the court will release the plaintiff’s bond (post ex parte hearing). We discussed the timing of the receiver taking action under the court order when a condition was the posting and filing of the receiver’s bond: Should it be before any acts are undertaken; five days after the order is signed; or as soon as is reasonably possible? It was the group’s consensus that the receiver should wait until the bond is filed with the court before acting, unless there are exigent circumstances, under which the bond could relate back to the time of signing of the order.

What about claims against the receiver’s bond after discharge? Those claims may be brought only against the assets of the estate, then the bond company. The receiver’s personal assets are generally not available, per final order, to settle any claims against the estate. Therein lies that very practical and frightening prospect that the receiver generally has signed an indemnification condition to the bond issuance and therefore, if the bond company pays any claim…..time for the receiver to rethink career choice.

Receiver Services
Included in the Act were services the receiver could provide, if licensed to do so: an attorney, accountant, auctioneer, or broker. I was troubled by language giving the receiver authority to act as a broker, which in turn entitles the receiver to make commission on a sale of receivership estate real property. How can that not be a conflict of interest?

Automatic Stay
The discussion on Section 13 focused on the need to keep exceptions to the stay very narrow in order to protect the receivership estate. As drafted, this section is overly broad.

Sale of Property
Issues arose about Section 15 regarding the sale of receivership real property and what happens to liens. The MCRERA proposed that the receiver’s sale of commercial real estate would emerge free and clear of liens as long as those liens are junior or subordinate. At one point, there was talk that there should be the consent of the owner before a receiver sale could take place. The consent requirement was ultimately shelved. Other sale of real property by receiver issues that were discussed included mechanics lien treatment; leasing (tenants’ rights); and licensing. If a party can establish diversity, and move the action to federal court, that could allow the receiver to sell real property regardless of the underlying state’s foreclosure laws.

Executory Contracts
In Section 17, the ULC committee wanted to include a 90 day window within which a receiver had to assume or reject a contract. If no action was taken within that time period, it would be deemed accepted. I opposed that specific time period, and ultimately it was removed from the Act. We also discussed the rights of receivers to assume or reject an executory contract. The committee wanted to have it subject to a noticed court hearing. I argued it should be part of the receiver’s rights under the appointing order. Other assumption/rejection issues of executory contracts relate to franchise agreements (as the appointment in and of itself could be grounds for cancellation by the franchisor); leases with non-disturbance provisions; as well as insertion of “commercially reasonable” leases that should not be rejected. However, what about “sweetheart” leases crafted to circumvent the Act by giving below market deals to favored tenants or to simply interfere with the appointing party?

The meeting concluded with a discussion on the enactability of the MCRERA. Would it make a difference to the various states’ analysis if it were titled a “Model Act” or a “Uniform Act” in their consideration?

*Gordon Dunfee, Law Office of Gordon Dunfee, is a member of the CRF San Diego Board of Directors and the Acting President of the California Receivers Forum State Board of Directors. He is a receiver and counsel to receivers.